Entrepreneurs: When it comes to pyramid schemes, don’t be in denial

Promotional materials and live presentations for Fortune Hi-Tech Marketing used a lot of organizational jargon to recruit new people. The first step: Shell out start-up fees and monthly charges. Next: Recruit enough “independent reps” so you can work your way up through the ranks to Regional Sales Manager, Executive Sales Manager, National Sales Manager, Platinum Sales Manager, and ultimately “Presidential Ambassador.” But the FTC and the State AGs of Illinois, Kentucky and North Carolina have another term for FHTM’s convoluted system of recruiting and compensation: They call it a pyramid scheme.

Last year, the FTC and the states sued FHTM, related companies, and individual defendants, alleging they deceptively claimed people would make big bucks by signing up to sell FHTM’s health and beauty products and services from other vendors. What kind of bait did they dangle before would-be entrepreneurs? According to one video, “Four months in . . . I had actually quadrupled what I have ever made as a Registered Nurse.” One of FHTM’s Platinum Sales Managers said in a video that people who reach the upper levels were making between $30,000 and $70,000 per month. During a recorded conference call posted on a team website, an FHTM Presidential Ambassador claimed that a colleague involved for only six months “earned over $50,000 in one month” and “millions and millions beyond that.”

Ultimately, more than 350,000 people enrolled, but the FTC and State AGs say the bottom line was a far cry from FHTM’s bluster. After conducting its own investigation, the court-appointed receiver concluded that FHTM’s main business was recruiting new members and not selling stuff – a key factor in differentiating a pyramid scheme from a legitimate multilevel marketing plan. For example, 98% of participants lost more money than they made and at least 88% didn’t even recoup their enrollment fees. To the extent people made any money, 81% of the payments to FHTM participants came from recruiting new members, not from sales.

To settle the case, the defendants have agreed to a lifetime ban from multilevel marketing. The stipulated order imposes a judgment of more than $169 million, which will be partially suspended when they surrender certain assets with an estimated value of at least $7.75 million, including property from the estate of defendant Paul Orberson, who died while the case was pending. What kind of valuables are we talking about? A farm in Kentucky, a Florida condo, a house in South Carolina, a BMW, a Jeep, two boats, a sports memorabilia collection, coins, and bullion. The jet skis? They’re going, too.

What can bizopp buyers and sellers take from the case?

Right on the money? Some bizopp sellers argue that earnings claims are just harmless puffery. Wrong. If you state – or imply – that people will achieve certain results, you need competent and reliable evidence to back up those promises. And don’t think that one person’s unusually successful outcome will be sufficient to support a general money-making claim. Save the cherry-picking for the pie.

United we stand. The FTC and State AGs stand shoulder to shoulder to protect consumers from questionable money-making ventures. Sometimes the cooperation is behind the scenes; other times we’ll file a case jointly. Either way, we work together to ferret out fraud and deter deception.

A ruse by any other name. The evidence showed that the FHTM defendants targeted Spanish-speaking consumers and members of immigrant communities for their shady pitch. Deception is deception, regardless of the language or demographics.

A word for entrepreneurs. View business opportunity pitches with a skeptical eye, especally if the person making the promises stands to make money from your participation. Before investing so much as a nickel, run it past someone with proven business savvy who isn’t trying to sell you something. The FTC has free resources in English and Spanish to help you evaluate the options, with specific advice on multilevel marketing. One possible tip-off to a bizopp rip-off: If the focus is less on selling the product and more on recruiting new members.

Please precisely define pyramid scheme term. I am involved in a mlm purchasing a professional website to purchase orders and answer product questions if I am unavailable or after hours. It received about 1000 visits, I received not a flipping penny. $9.95 a month, 3rd year, patiently waiting for error to be caught. Revenue department says pirating perhaps? MBAs do not like looking stupid. Thanks for help.

Bill, federal regulators wax and wane based on what kinds of politicians are in. FTC, SEC, EPA, DOL all reflect the times. Even an FTC web page could reflect a bias towards a business-friendly environment or a bias towards pursuing fraud. For example, look at Lanny Breuer and his attitude towards pursuing systemically dangerous institutions. Just because the FTC website said so doesn't mean that Tex is wrong.

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